By pretending that drivers and auto insurance companies have ‘equal bargaining power,’ the myth is used to bind drivers to outrageous contract terms and to shield insurers from judicially-created protections for drivers
Here’s the truth about the Michigan Supreme Court’s “Freedom of Contract” myth: it allows Michigan auto insurance companies the “freedom” to make and live by their own rules, and hundreds of innocent and injured people are being harmed as a result. It is extremely flawed public policy created by activist Republican justices aimed to help insurance companies. Once again, Michigan goes its own way while the entire nation goes the other. There is a cost for this “freedom,” borne exclusively by Michigan drivers and seriously injured auto accident victims. But at least the auto insurance companies are happy.
Based on the implausible, if not outright laughable fiction that Michigan auto insurance companies and ordinary people have equal bargaining power in setting the terms of an insurance contract, the “Freedom of Contract” myth has a double-edged sword quality when wielded by the Michigan Supreme Court’s politically partisan Republican justices.
The “Freedom of Contract” myth can be invoked to bind drivers and auto accident victims to the breathtakingly one-sided terms of auto insurance contract, and to void and take away valuable protections from completely innocent drivers, as the Court just did again on June 15, 2012 in Titan Ins. Co. v. Hyten, et al. (Lawyers Weekly No. 06-78773 – 27 pages) (Michigan Supreme Court) (Markman, J., joined by Young, C.J. and Mary Beth Kelly and Zahra, JJ.) (Hathaway, J., dissenting, joined by Cavanagh and Marilyn Kelly, JJ.)
The flawed argument is basically this: By exercising their freedom of contract, these drivers and accident victims freely entered into the contract with the auto insurance company and, thus, they cannot complain about having to abide by onerous and unfair contract terms to which they “freely” agreed.
Alternatively, the “Freedom of Contract” myth can be invoked to shield auto insurance companies from judicially-created protections for drivers and auto accident victims.
The argument being: because the judicially-created protections were not contained in or incorporated into the auto insurance contract, they were not bargained for by the auto insurer and, thus, it would violate the insurer’s freedom of contract to hold the insurer to conditions that it neither bargained for nor agreed to.
In his now infamous 2005 majority opinion in Rory v. Continental Insurance Company, then-Justice Robert P. Young Jr. summed up the conservative Republican philosophy for using the “Freedom of Contract” myth to roll back decades of law that gave victims a fighting chance against over-reaching insurance companies:
“Courts enforce contracts according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract. … ‘[C]ompetent persons shall have the utmost liberty of contracting and … their agreements voluntarily and fairly made shall be held valid and enforced in the courts.’ … When a court abrogates unambiguous contractual provisions … the court undermines the parties’ freedom of contract.”
Not so, says the Supreme Court’s most senior justice.
In his recent dissent in DeFrain v. State Farm Mutual Automobile Insurance Company, Justice Michael F. Cavanagh, who has railed against the “Freedom of Contract” myth for years, debunking it at every turn, stated what should be obvious to everyone – even to his conservative Republican colleagues on the Supreme Court:
“An approach requiring adherence to the parties’ purported ‘freedom of contract’ stems from, in my view, the fiction that the contractual term was truly bargained for and ignores the reality of how insurance policies normally come into existence.”
Judicially created protections
Auto insurance companies have always dictated the terms of the auto insurance contracts they sell to Michigan drivers. The big difference is that in most other states ordinary people are protected against this. They have some “reasonable expectation” that they will get the help they paid for when they are injured.
Not so in Michigan! And with no bad faith law to protect people here either, insurance companies now essentially have permission under this flawed reasoning by our Court’s politically-motivated activist Republican Justices to make insurance contracts as onerous, one-sided, and unfair as possible.
Not surprisingly, the contracts and their terms are stacked in the insurance companies’ favor, packed with lots of fine-print trickery intended to maximize the insurers’ opportunity to deny liability and avoiding paying out on claims.
But not all Michigan Justices have been so willfully blind to the auto insurance companies’ anti-consumer chicanery:
“Courts have recognized that insurers are in a position of power and control over the people purchasing their product. … The average person does not sit down and bargain for each of the terms in his insurance contract. Quite the opposite is true. … In most situations, the individual pays his insurance premiums and then receives the contract in the mail days or weeks later. … [W]hen one side presents a contract on a take-it-or-leave-it basis and is in a place of considerable power over the other, there can be no bargained-for exchange.” (Rory v. Continental Insurance Company, Michigan Supreme Court, 2005, Justice Kelly’s dissent)
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“There is no meeting of the minds except regarding the broad outlines of the transaction, the insurer’s desire to sell a policy and the insured’ desire to buy a policy of insurance for a designated price and period of insurance to cover loss arising from particular perils … The details … are generally not discussed and rarely negotiated.” Lotoszinski v. State Farm Mutual Automobile Insurance Company (Michigan Supreme Court, 1982, Justice Levin’s dissent)
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“‘An insurance policy, though in form a contract, is a product prepared and packaged by the insurer.” Raska v. Farm Bureau Insurance Company (Michigan Supreme Court, 1982, Justice Williams’s dissent)
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Those are the dissents written by Justices Kelly, Levin and Williams.
In the past, in the days when there was still some concern about fairness and reasonable expectations Michigan courts had previously ruled:
- A contract between two parties “[w]here one party has less bargaining power than another … deserves close judicial scrutiny.”
- “Reasonableness” governs enforcement of contractual provisions that shorten the time for suing auto insurance companies.
- A contract will be enforced so that it conforms with an insured’s “reasonable expectations.”
- The time period for suing an insurance company is tolled, i.e., stops, with the filing of an auto accident victim’s claim and resumes only with the insurer’s official denial of the claim.
- Prejudice to the insurance company must be shown before the insurer can deny an accident victim’s claim on grounds the victim failed to comply with the insurance contract’s notice-of-claim provision.
Unfortunately, none of those “level-the-playing-field” measures are the law today.
Today they have all been overruled by the Michigan Supreme Court’s politically-partisan and activist Republican majority. Protections for ordinary people runs afoul of the auto insurance companies’ “Freedom of Contract.”
‘Freedom of Contract’ reigns
In discarding the “close judicial scrutiny” and “reasonableness” tests, the conservative Republican majority in Rory v. Continental Insurance Company ruled:
“When a court abrogates unambiguous contractual provisions based on its own independent assessment of ‘reasonableness,’ the court undermines the parties’ freedom of contract.”
In rejecting the “reasonable expectations” rule, the activist Republican majority in Wilkie v. Auto-Owners Insurance Company held:
“[The reasonable expectations rule] is contrary to the bedrock principle of American contract law that parties are free to contract as they see fit … The notion, that free men and women may reach agreements regarding their affairs without government interference and that courts will enforce those agreements, is ancient and irrefutable. … Respect for the freedom of contract entails that we enforce only those obligations actually assented to by the parties. … We believe that the rule of reasonable expectations markedly fails in this respect.”
In striking down the tolling rule, the activist Republican majority in McDonald v. Farm Bureau Insurance Company held:
“We believe the better position is for parties to determine their own contractual provisions and then bear the responsibility of enforcing them as written.”
Finally, in relieving auto insurance companies of the requirement that they show prejudice before denying liability for failure to comply with a notice-of-claim provision, the activist Republican majority in DeFrain v. State Farm Mutual Automobile Insurance Company ruled:
“[R]eading a prejudice requirement into the notice provision … frustrated the parties’ right to contract freely.”
– Steve Gursten is an insurance attorney and head of Michigan Auto Law. Steve is also president of the Motor Vehicle Trial Lawyers Association. He frequently writes and speaks about Michigan No-Fault and case law, and is available for comment.
Michigan Auto Law is the largest law firm exclusively handling car accident, truck accident and motorcycle accident cases throughout the entire state. We have offices in Farmington Hills, Detroit, Ann Arbor, Grand Rapids and Sterling Heights. Call (248) 353-7575 to speak with one of our Michigan insurance attorneys.